Wednesday, January 24, 2007
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Bolivia gambles on energy and wins - for now

COCHABAMBA, Bolivia - When President Evo Morales ordered Bolivia's energy fields nationalized last May and sent federal troops into its abundant gas fields to make his point clear, critics warned that he would isolate Bolivia and choke off its main source of revenue.

But with Morales about to celebrate his first anniversary in office Jan. 22, most Bolivians regard the nationalization as a tremendous victory.

No foreign energy companies have left. The revenues that critics warned would disappear have instead multiplied. And Morales is riding a new surge of popularity: The former coca grower and political outsider who became Bolivia's first indigenous president has pushed his approval ratings back up over 60 percent nationally.

"The energy deal is his greatest success so far," said Michael Weinstein, a senior analyst with the Power and Interest News Report in Chicago. "Morales has been a masterful pragmatist."

Doubts remain. Analysts in Bolivia and neighboring Brazil, home to Petrobras, the biggest foreign investor in Bolivia's energy industry, say Morales' short-term victory could backfire if companies refuse to make long-term investments.

They warn that Morales might overplay his hand, trying too hard to follow the script of his mentor, Venezuelan President Hugo Chavez, without the same petroleum riches that make Chavez so formidable and Venezuela so impossible to ignore.

Yet for now, what most Bolivians see are high gas prices and new contracts that give the Bolivian state a far greater share of the profits reaped by Petrobras, Spain's Repsol and other international energy companies.

How this all turns out is important not just for Morales and Bolivia.

Bolivia has the second-largest natural gas reserves in Latin America, after Venezuela, and the region counts on Bolivian supplies to fuel its economies. Brazil and Argentina, the biggest of the bunch, are the most dependent on Bolivian gas.

Beyond that, Bolivia is seen as an economic test case. It is one of the poorest nations in the Americas, with more than 60 percent of its 9 million people living in poverty.

The opening of Bolivia's economy in the 1990s by a series of presidents who succeeded military rule was supposed to alleviate that poverty. But the free-market policies and privatizations, which turned state energy assets over to Petrobras and other foreign giants, often for nothing but a promise to invest, failed to deliver prosperity.

So Morales and his Movement Toward Socialism are reversing the privatizations. The government is taking back energy assets, though at compensation levels the foreign investors complain are too low. And they are whipping up an economic mix of socialism and statism that, so far at least, still has a healthy helping of private enterprise.

Morales is one of several left-leaning politicians to rise to power in Latin America in the past few years. If he can make this work, he would satisfy not only his base among leftist groups, the poor and indigenous communities in Bolivia. He would also give ammunition to others in the region who reject the fiscal austerity and raw capitalism often preached by Washington and international lenders such as the International Monetary Fund.

"The left in this country has surpassed the IMF's deficit-reduction dreams doing exactly the kinds of things that the standard policy said shouldn't be done," said Jim Shultz, who directs The Democracy Center in Cochabamba.

Yet even Morales' supporters acknowledge that he has made mistakes.

The first officials Morales named to run the energy sector were long on ideology but short on expertise. Things got better after Morales sacked them.

And Morales has angered Bolivia's investment partners by suggesting that all foreign companies are thieves. In some dealings in the economic sphere, critics see in Morales arrogance and a taste for authoritarianism that they contend infects his politics as well.

Brazilian President Luis Inacio Lula da Silva counts himself a Morales supporter. But even Lula was moved last year to chide Evo, to use the names by which the men are widely known.

While acknowledging that Brazil and its 186 million people need Bolivian gas, da Silva also reminded Morales that Bolivia and its 9 million inhabitants need Brazil. Without Brazil to buy the gas, da Silva pointed out, Bolivia would be doomed.

Relations between Brazil and Bolivia have improved of late. Petrobras, which is publicly traded but controlled by the Brazilian state, defended the new deal by predicting it would produce a 15 percent return on investment. After exploring ways to pull out of Bolivia, Petrobras now says it will consider new projects.

Yet Brazil is still balking at paying steeply higher prices for Bolivian gas, as Morales was able to force Argentina to do.

A foreign business executive in Santa Cruz said the energy companies stayed on through the nationalization process because the new contract still allows them to turn a profit on wells already in production.

Future investment is in doubt, however, the executive said. If the Morales government strictly limits the potential rewards, foreign investors will not take the risks that come with exploration.

"What's going to happen in two years, when the take is not sufficient to support exploration?" said the executive, who asked not to be named to protect his company's relationship with Morales. "One of the things that Evo's government does not recognize is the concept of risk capital. You take a risk now to get rewarded in the future.

"They are acting like, `Well, you just don't drill dry holes!'" the executive said. "It's wait and see. But everyone is looking for ways to get out."

Morales already has shown he knows how to sweeten a deal. The contract that Petrobras and others signed at the end of October was less lucrative than the one they had before the nationalization. But it was better than many had feared, and Morales' team had shown a willingness to work with the companies, analysts said.

The president will need more of that flexibility in the coming year.

"Morales is like every leader of a popular left movement that achieves power," said Weinstein, who also teaches political science at Purdue University. "You have a kind of tightrope act that this kind of leader has to go through. He has to satisfy the base from whence he came. ...

"And on the other side, he is going to face resistance from the vested interests whose power he is trying to diminish."